In this article we explore unsecured loans, their relative advantages, and the types of business who may benefit from unsecured finance. We also discuss how easy unsecured loans are to get, and how they impact your credit rating.
How unsecured loans work
No collateral is provided in an unsecured loan, meaning that guarantee of repayment must be made through other means. A personal guarantee may be given instead of collateral, in which a guarantor (usually the company director) agrees to cover the cost of the loan if repayment is not otherwise possible.
Types of unsecured loans
A broad range of finance products are unsecured, and a few of the main ones are explored below.
Unsecured business loan. A loan not backed by collateral, where the decision to lend is based on the creditworthiness of the director or owners of a business and the responsibility to cover a defaulted loan rests on them.
Business cash advance. A loan based on previous debit and card sales, which is repaid weekly as a percentage of future card sales.
Equity crowdfunding. A loan borrowed via contributions from multiple lenders, who receive equity in the business along with repayment of their loan.
Debt crowdfunding. Similar in structure to equity crowdfunding, except that equity is not offered and a personal guarantee is given instead.
Donation crowdfunding. Again, similarly structured to equity crowdfunding except that lenders donate money solely on their belief in the business they are funding.
Advantages of an unsecured loan
Unsecured finance applications are usually quicker and less complex than their secured equivalents, meaning that capital can often be accessed within a few days. As no assets are required to take out this type of loan, there is reduced risk for the borrower. The involvement of a guarantor means that their credit history will be assessed rather than the borrower's, allowing unsecured finance to be accessed by those with subpar credit ratings.
Smaller amounts of money are available in unsecured loans, allowing businesses to cover slower periods without committing to lengthy repayment terms that are often associated with secured loans.
Disadvantages of an unsecured loan
Businesses with weaker trading positions are less likely to qualify, as the decision on whether to lend is made against indications that repayment will be possible. This decision is more likely to be in favour of the borrower if a reliable guarantor can be found, but the guarantor's personal assets are at risk and may be taken if the business that originally borrowed is unable to repay.
Because collateral is not offered, interest rates are usually higher. An unsecured loan without a guarantor will feature even higher interest rates, as the absence of a guarantee that the loan will be repaid in case of default means the borrower must further offset the risk.
Fewer unsecured finance products are regulated by the Financial Conduct Authority (FCA), and those not regulated by the FCA are not overseen by the Financial Ombudsman Service. This may mean less legal recourse is available in the case of a dispute.
Who are unsecured loans best suited to?
In our experience, businesses who do not have high-value assets (or do not wish to offer these as collateral) stand to benefit from unsecured finance. They are given the freedom to borrow money to assist with expansion and growth, while maintaining peace of mind that their assets are not at risk.
Businesses looking to embark on a capital-intensive project can benefit for the same reason: they are able to carry out the project safe in the knowledge that risk to business property and assets is minimised.
Industries such as retail and leisure are also well suited to unsecured finance, as the terms of lending favour businesses who are prone to have unexpected expenses that need only short-term loans to bridge the gaps.
The Access Commercial Finance team are happy to talk you through any of our financial solutions, unsecured or otherwise. If you have questions feel free to get in touch, or take a look at our unsecured business loans calculator to see what a loan and repayment plan might look like for your business.